Is cross-ownership a competition problem in Australia?

Possibly.

First some context. I raised this issue a couple of years ago in a post here. It was motivated by new research in the US on the impact of cross-ownership by institutional investors on competition in US airlines.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

That research was recently updated but has also been extended to banks and also executive compensation consistent with a competition-reducing effect (compensation is based on absolute rather than relative performance).

In an op ed, Shadow Assistant Treasurer and my long-standing co-author, Andrew Leigh, took the US approach and applied it to Australia. He looked at cross-ownership patterns but he made a mistake looking at custodial firms (who don’t have voting or influence rights) rather than the core institutional investors that are the core of the theory. Peter Martin pointed out the error. Who knew that determining ownership could be so complicated?

This of course highlights how difficult it is for politicians to research and make arguments. One little error and it is as if the whole hypothesis doesn’t exist any more. But we academics in the real world don’t operate that way. What I wondered was: do the patterns we see in the US match occur in Australia.

Fortunately, for me, I didn’t have to do much heavy lifting to find out. Here are some summary stats provided on Twitter by Martin Schmalz who is a key player in the US studies. First, let’s check out energy retailing:

The top three investors are the same across the two biggest competitors in Australia.

Let’s turn to grocery and other retailing:

Wesfarmers (who owns Coles) and Woolworths have some similarities there.

Or petrol:

Or investing itself:

For banking in general, I took a look and NAB’s top shareholders are (Vanguard 2.03% and BlackRock 1.43% and Capital Research and Management Company, 1.13%); Commonwealth Bank has (Vanguard 2.78%, BlackRock 1.46% and Govt Pension Fund of Norway, 0.88%), while Westpac appears to have little shareholder concentration.

Looking at telecommunications we have Telstra (Capital Research and Management Company, 1.13%; Vanguard 1.62%, BlackRock 0.63%) while Singtel is owned by the Singapore government.

This is, of course, far from a comprehensive concern but the pattern is interesting. The very funds — BlackRock and Vanguard — whose ownership changes were related to competition reductions in the US by research there have the same pattern of ‘diversified’ holdings in Australian oligopoly companies.

Now you might say that even so, the ownership of the largest shareholders is low. That is true. It is not like they themselves command a majority for voting purposes. However, as the largest shareholders they have power and their trading behaviour can impact on the returns of others. The very fact that we see cross-ownership patterns in Australia similar to the US where there are concerns that have been measured suggests that this is something we need to watch.

Related

3 thoughts on “Is cross-ownership a competition problem in Australia?”

How much of these ownership percentages are due to the fund managers investing due to passive investment mandates (I.e. Constructing portfolios to replicate market index) versus active investment mandates where concerns about impacts on company decision making might be more legitimate?

Vanguard mainly a passive index fund investor. Blackrock is both active and passive offering a lot of ETFs. A lot more work is necessary here to conclude anything about concentration and overlaps. These observations true for the US as well as Australia.

It is a bit more complicated than just looking at fund managers. For unitized product the decision to vote resolutions typically rests with the fund manager who is delegated that responsibility from the trust’s Responsible Entity. In the case of discrete mandates, the fund manager will sometimes receive a delegation from the owner of the funds (e.g. an underlying superannuation fund) to vote the shares, but on other occasions the decision is referred back to the owner of the funds. Even where a fund manager holds a delegation (to advise the custodian) how to vote the shares, that delegation involves an agreement with the owner about “how” (as in guideline) the shares are to be voted, and when the owner must be consulted prior to issuing a voting instruction.

For the great bulk of commercial decision making, I seriously doubt that cross-ownership plays any role.

However, there are some areas where the concentration of ownership in a small number of superannuation funds (and fund managers) does create problems, particularly in the small Australian market. The most serious issue arises in the pricing of IPO’s and share placements. Prior to launching a deal, issuing companies and their investment bankers typically do what are euphemistically called “sounding” of the large shareholders in the sectors, or in the case of placements they do “soundings” of large existing shareholders. Even if all confidentiality is maintained, pricing gets set by very few investors. It is too easy (and perhaps idle) to speculate, but any leakage of confidential information is big problem, and difficult to prove.

The specific issue with the Australian banks and their obscene ROE’s is that they have become such a large chunk of everyone’s retirement funds that politicians have become scared and paralyzed to do anything about their outrageous behaviour. The most recent round of increases in the mortgage rate spread must rank as one of the best example ever of tacit cooperation among non-competitors. (Abetted of course by regulatory guidance – enough said).